“I had a work colleague approach me today to ask about buying a condo in New West. She had no idea about the economics of ownership and real estate.”

“I had a work colleague approach me today to ask about buying a condo in New West. First it was interesting that it was a new project, marketed by Bob R. himself, but what was more interesting was how my colleague had no idea about the economics of ownership and real estate. We took the 600 sq ft unit she was looking at and calculated that over a 5 year period (Assuming this was a 5 year plan) the cost of ownership would be approximately $1,800 per month for interest, strata, taxes and then assuming a real estate commission / transaction costs at the end of 5 years. We assumed there would be no PPT as this was a low cost purchase for a first time buyer.
She was surprised to see it would be that much but $1,800 does not sound too expensive does it? So we did two things. Look at what you could rent for $1,800 and look what it would cost to rent the unit she was looking at.
For $1,800, she could rent a newer 1,100 sq ft unit in New West. That’s pretty much double the size she was going into.
Or – for $1,100, she could rent the unit she was looking at, or $700 per month less than owning.
What I said to her was this:
You can rent this for $700 per month less per month than owning ($8,400 per year) – After 5 years, you could save close to $50,000. That is the equity built from renting compared to owning. Or, you could spent the $1,800 you were going to spend anyway, and live in a much more expensive place. Either way, you are getting way more.
The math was really interesting to her as she is really quite young and never seen such numbers presented. To her however, it seemed pretty clear. At the end of 5 years, $50,000 of savings or, do you bet that that condo you buy is going to up by $50,000 in the next 5 years? Seemed clear to her.
The next day I saw her at lunch, surfing for new properties.”

– from ZRH2YVR via e-mail, 6 May 2012

17 responses to ““I had a work colleague approach me today to ask about buying a condo in New West. She had no idea about the economics of ownership and real estate.”

  1. Carioca Canuck

    Of course the usual post to a thread like this is often…..”well, with RE you are paying yourself……. because most people don’t have the discipline to save money”…..

    The discipline is not required to save money per say, but to manage your cash flow regardless to ensure that you have $1,800 available each and every month for either the mortgage. or saving the difference after payoning one’s rent. So, it’s a red herring and typical RE bull argument which is easily debunked.

    Of course, if you’ve gone this far with her already, the next step is to explain to her how much it is going to cost to access any of her “mythical” RE equity should that option be required, versus merely writing a cheque from savings, or by doing some internet banking when you’ve got the cash.

    Now, don’t even try and talk about moving due to a job loss, or some other life changing event, and what that can actually cost a homedebtor in a down market……..obviosuly wiping out any of the “mythical” equity in her dreams, but in reality, trapping her to her a anchor and maybe even bankruptcy.

    I don’t think my “Heavne’s Gate” cult comparison was that far off actually………Canadian RE today has the disasterous potential for financial suicide at it’s finest.

  2. It is difficult to elucidate the reasons why buying should be cheaper than renting, not least because low probability high severity risks are difficult to quantify so are often ignored.

  3. 4SlicesofCheese

    100 bucks says she comes back and tells you good news she decided to buy cause “she didn’t want to be paying someones mortgage”.

  4. You should encourage her to buy! Life lessons are best learned young.

    Besides, the more people sucked in the better…fewer potential purchasers later

  5. I’ve had this conversation with a few people. Older people with little in the way of assets or savings who would be millionaires if they just sold their little house; young people who seem to understand that we are in a bubble but can’t understand why it would be bad to buy since they won’t be making some investor rich by paying off their mortgage. All you can do is give them the info and the rest is up to them.

    • mahatma! … roughly … freedom worth having must include the freedom to make mistakes

      • Quite. The CPC take their dogma from the best.

      • it’s self-consistent as long as you don’t expect others to pay your mistakes … i’m not cpc, btw, but i can see your pt where such parties might use that when convenient – ergo crony hypocrisy

      • I’m not affiliated with CPC either but the grassroots is definitely into self-determination but rounds it out with atonement. The perils of debt and its prescribed consequences predate some measures of time.

      • if forced to label, my brand of crazy = small govt republican/libertarian … no war, no fed, no income tax … probably grown philosophically incompatible with the maple kingdom in the past decade … anyway, it’s very popular among the young … because they’re getting screwed the worst and just want to get free … respet it’s easier for me to speak freely from outside, no need to answer … looks good up there – high of 57F and sun – have a nice day 🙂

      • Where I have worked apprenticeship — and this is not limited to the middle and lower classes — required a healthy demographic mix and the employees craved it. Maybe this is becoming broken in some older firms and institutions (and, for real estate, neighbourhoods?) but I’m a believer in creative destruction for those (‘hoods) that don’t adequately plan for generational crossover.

  6. Paul Streppel

    I lived in New West for 6 years, renting an apartment on 6th st and 7th av. The hardest thing to get used to, if I ever did, was the almost constant ambulance sirens. I don’t know what it’s like now. I had a pretty good view of the north side mountains on clear days. The cloud cover hangs onto that side of the lower mainland. Only a short distance away, South Surrey, it would be much brighter, and I would long for some of that weather in New West. Back in those days, 1996-2002, the member of Parliament was a Reform candidate, and the elections were very hotly contested. One day a person described to me that the New West riding resembled a clash of civilizations. The analogy today, if you were to describe the Lower Mainland as ‘Europe’, would be to suggest New West is Greece, falling partly under the umbrella of the slavic orthodoxy of Russia (ndp) partly under the influences of the Levant (liberal) and with one foot in the door to Western Europe (conservative)… The importance of Greece as a civilization pivot point was elucidation by Huntington and Kennedy in their civilizational studies many years ago. As to the importance of New West to the greater Lower Mainland… who knows? But try escaping the Greek financial austerity drama… Ha!… maybe if yo live in a cave, Plutonians

  7. I just wrote an quick analysis on CMHC and Fannie/Freddie http://worldhousingbubble.blogspot.com/2012/05/comparing-canadas-cmhc-to-us.html if anyone is interested. I also try to clear up some rife oversimplification I frequently see regarding Fannie/Freddie.

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